Yuan takes Chinese corporate profits down with it

BEIJING--Chinese companies increasingly have been borrowing cheap money from abroad. Now they are paying for it.

Several Chinese companies reported hits to their first-half financial results from foreign-currency exchange rates, after borrowing billions of dollars from the U.S., Hong Kong and elsewhere. The culprit is the Chinese yuan, which weakened against the U.S. dollar in the first half and still hasn't gained back all the ground. A weaker Chinese currency makes Chinese exports cheaper abroad but also makes paying interest on foreign debt more expensive.

The problem is likely to continue.

"It's a legitimate concern, given uncertainties in the economy," said Bei Fu, an analyst at ratings firm Standard & Poor's. "It's hard to say if the yuan would continue to appreciate in the next three to five years."

Chinese energy producers and airlines have long been vulnerable to currency fluctuations because the global oil market conducts business in dollars. But the yuan's prolonged slump this year is broadening the impact.

In many cases the affect of foreign-exchange losses for Chinese companies is dwarfed by other factors, such as heady growth in China's Internet industry or broader woes in the country's property market.

But further weakness in China's currency could add to pressures that include the country's slowing economic growth. And borrowing is becoming more difficult in China as Beijing tightens credit following a lending binge that rekindled growth after the 2008 financial crisis but saddled China's financial system with potentially bad debt.

State-run Baoshan Iron & Steel Ltd. last week posted 270 million yuan ($44 million) in foreign-exchange losses for the first half as the weaker yuan increased financing costs on its dollar-denominated debt. The steelmaker said the currency losses were the largest factor in its 15% decline in its net profit.

Property developers listed in Hong Kong also have been hurt. Shui On Land Ltd., already battling China's real-estate slump, said last week it took a 126 million yuan hit in the first half from the weak yuan, compared with gains of 205 million yuan a year earlier as the currency appreciated. The company's first-half profit fell 24% to 797 million yuan.

Shui On Land, which had about 20.58 billion yuan in dollar-denominated debt as of June 30, cited gains the Chinese currency made in July and August. "We are still positive about the renminbi over the long term," a spokesman said.

Tencent Holdings Ltd. said in August that foreign-exchange losses were the main reason for a sharp jump in financing costs to 354 million yuan in the second quarter, compared with net financing income of 14 million yuan a year earlier. The Internet conglomerate in April completed a $2.5 billion bond sale in the U.S. Tencent's overall second-quarter profit rose 59% to 5.84 billion yuan. Tencent declined to comment for this article.

Banks, property developers and energy companies have led the rise in offshore borrowing among China's corporations. Mainland businesses had $169.2 billion of bonds outstanding held by investors outside China last year, up 60% from 2012 and more than double the amount in 2011, according to Nomura Holdings. The value of China's offshore debt issued this year is around $82 billion, already more than for all of last year and more than double the level of 2012, according to data provider Dealogic.

U.S. interest rates are lower than China's in part because of efforts by the U.S. Federal Reserve to add liquidity to the system. One result: A 10-year Chinese government bond is now trading at 4.2%, compared with 2.35% on a comparable 10-year U.S. Treasury note.

That coincides with a period of Chinese policy designed to quell inflation and overcapacity--legacies of a $586 billion stimulus program in late 2008. Many of those policies have limited the ability of Chinese companies in areas such as real estate to tap the country's vast pools of capital. Beijing also wants to drive out short-term speculators who assume yuan appreciation is an easy bet, according to central-bank officials. China's central bank keeps a tight grip on the currency's value.

Over the longer term, investors and analysts widely believe China will allow the yuan to resume its rise against the dollar. But the U.S. currency has risen steadily in recent years, making the case for yuan appreciation less likely.

So far this year, the Chinese currency has fallen 1.5% against the dollar, hitting its weakest level this year at 6.2676 yuan on April 30--also its weakest in nearly two years.

Baosteel said it began to accumulate dollar-denominated debt in recent years because of comparatively low interest rates. The company holds about 70% of its debt in U.S. dollars, out of a total debt portfolio valued at about $9 billion.

Such foreign-exchange losses are common at other Chinese steel mills, though the scale of their losses may not be as large as at Baosteel, said Xue Heping, a senior analyst at Yida Steel Research Center. "It's not confined to Baosteel. Many steelmakers made foreign-exchange losses because of such debt in the first half, but they choose not to report it, " he said. Mills were able to use lower raw-material prices in the first half to offset foreign-exchange losses, he said.

The state-backed China Iron and Steel Association said foreign-exchange losses are a rising problem, identifying the weaker yuan as a factor driving a 29% increase in financing costs for mills in the first half. "We need to watch operational risks and strengthen financial management to stop debt gearing from rising," said association President Xu Lejiang.

Wynne Wang in Shanghai and Fiona Law in Hong Kong contributed to this article.

Write to Chuin-Wei Yap at chuin-wei.yap@wsj.com and Esther Fung at esther.fung@wsj.com

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